How to get rid of PMI

If a borrower is applying for a conventional home loan but can’t make a down payment of at least 20%, they may still qualify for the loan. But they may have to pay private mortgage insurance (PMI).

PMI protects the lender in case the borrower fails to make payments on the mortgage. And while PMI can make homeownership more accessible, a borrower should consider getting rid of it as soon as possible.

Read on to learn why and how to do it. 

Key takeaways

• PMI can help a borrower qualify for a conventional home loan when they can’t make a down payment of at least 20%.

• PMI could cost hundreds or even thousands of dollars each year.

• Once a borrower builds up 20% equity in the home, they can ask their lender to consider canceling PMI.

• A lender must automatically terminate PMI once a borrower meets certain criteria.

• Reappraising a home and refinancing a mortgage are also ways a borrower may be able to get rid of PMI.

• While only conventional loans can come with PMI, other home loan types have similar costs associated with them.

While PMI can make it easier to secure a conventional home loan, it can cost hundreds or even thousands of dollars each year. That’s because:

• Paying for PMI upfront increases the closing costs. 

• Rolling PMI into the cost of the mortgage increases the monthly mortgage payments.

• Splitting PMI—paying some upfront and rolling some of it into the cost of the mortgage—increases both the closing costs and the monthly mortgage payments. 

• A lender that covers mortgage insurance—referred to as lender-paid mortgage insurance (LPMI)—may recoup the cost through fees or a higher interest rate.

Since PMI increases the cost of a conventional loan, a homeowner can save on the cost of their mortgage by getting rid of PMI as soon as possible—or avoiding it altogether.

Remember: PMI can be avoided on a conventional home loan by making a down payment of at least 20%. But there are a couple of other options that can help a borrower avoid PMI too.

A piggyback mortgage is exactly what it sounds like. It’s when you take out a second mortgage to “piggyback” off the other.

Piggyback mortgages are typically done in an 80-10-10 configuration—80% of the home is financed with the main mortgage, a 10% down payment is made and the remaining 10% is financed with the second mortgage. That’s why a piggyback mortgage is also known as an 80-10-10 loan.

Keep in mind that while a piggyback mortgage can help a borrower avoid PMI, the interest rate on the second mortgage is typically higher than that of the main mortgage. And you’ll likely need to have good credit scores to qualify, as well as a low debt-to-income ratio.

Some lenders offer lender-paid mortgage insurance (LPMI) in place of borrower-paid PMI. But it’s worth noting that LPMI can’t be removed. And lenders who offer LPMI typically recoup the cost through fees or higher interest rates.

If a borrower can’t make a 20% down payment on a conventional home loan and has to pay PMI, they might not have to pay it for the life of the loan. Here are a few different ways to get rid of PMI:

Under the Homeowners Protection Act (HPA), a borrower can request cancellation of PMI once their loan-to-value (LTV) ratio falls to 80%. That means the borrower has built up 20% equity in the home, and the principal balance is 80% of the original loan amount.

PMI cancellation requests must be made in writing, and the borrower must have a good payment history on the loan.

Even if a borrower doesn’t request PMI cancellation, the HPA requires lenders to automatically cancel PMI once the LTV ratio falls to 78%. That means the borrower has built up 22% equity in the home, and the principal balance is 78% of the original loan amount. This type of automatic cancellation is called automatic PMI termination.

Keep in mind that in addition to reaching an LTV ratio of 80%, a borrower must be in good standing and not have missed any payments in order for automatic PMI termination to apply.

The HPA also requires lenders to cancel PMI once the borrower reaches the halfway point of the loan—no matter whether the LTV ratio has fallen to 78%. The lender must also cancel PMI once the borrower reaches the halfway point of the loan—whether or not they’ve reached 78% of the home’s original value. These types of automatic cancellation are known as final PMI termination.

Keep in mind that in addition to reaching an LTV ratio of 78% or the halfway point of the loan, a borrower must be in good standing and not have missed any payments in order for final PMI termination to apply.

If the market value of a borrower’s home increases, a reappraisal could decrease the LTV ratio and increase the equity in the home. Then, if the LTV ratio is 80% or less—meaning the equity is at least 20%—the borrower could request PMI cancellation. And if the LTV ratio is 78% or less—meaning the equity is at least 22%—then automatic PMI termination may apply.

If a borrower is refinancing a mortgage and finds that they have at least 20% equity in the home, they may qualify for a new loan without PMI.

Of the different types of home loans, a conventional mortgage is the only one that may require PMI. But other home loans come with similar costs.

Federal Housing Administration (FHA) home loans require mortgage insurance premiums (MIPs). MIPs serve a purpose similar to that of PMI and protect FHA-backed lenders in case the borrower can’t pay back the loan.

Unlike PMI, however, MIPs are required of all FHA loans and include both an upfront premium and an annual premium. And while PMI can be gotten rid of or avoided completely, MIPs can’t. Instead, a borrower has to pay MIPs for the life of the loan if they make a down payment of less than 10%. If the down payment is at least 10%, then the borrower will pay MIPs for the first 11 years of the loan term.

Home loans backed by the U.S. Department of Agriculture (USDA) or the Department of Veterans Affairs (VA) come with what’s known as a guarantee fee. Also known as a funding fee, a guarantee fee helps the USDA or VA repay the lender if the borrower defaults on the government-backed loan.

The guarantee fee is made up of both an upfront and annual fee. And like MIPs, the guarantee fee is required of all USDA and VA home loans—it can’t be gotten rid of or avoided like PMI can.

PMI can make homeownership more accessible if a borrower can’t afford a down payment of at least 20%. But it can cost hundreds or even thousands of dollars annually. Fortunately, there are a number of ways to get rid of PMI. And the sooner a borrower can get rid of PMI, the more money they might save. 

If you’re just planning ahead for how to avoid PMI and haven’t yet bought a house, you might have other questions about the costs that can come with homeownership. Check out Capital One’s guide on determining how much house you can afford.